Reviving Bangladesh's banking sector

Treated as a foundation of economic development, Bangladesh's banking industry is now in danger of becoming its Achilles' heel.

Rising non-performing loans (NPLs), poor governance, and stagnant innovation undermine confidence, limit credit expansion, and threaten financial stability. If dynamic changes are not brought in, Bangladesh may lose one of its main tools for maintaining long-term economic development.

By late 2023, Bangladesh Bank claimed NPLs were 11% of all outstanding loans, well over the advised safe level of 5% by the IMF. People are talking about 11% becoming almost 30% by the end of December 2024 and even 35% in December 2025.

Although they own less than 30% of the banking assets, state-owned banks are responsible for more than 45% of problematic loans. Unresolved vulnerabilities might reduce Bangladesh's GDP growth by 1.5% yearly, compromising its aim for upper-middle-income status, according to the 2025 report of the World Bank.

Still, this approaching disaster is not unavoidable. It results from choices; better choices are still within reach if they are based on innovation and effective governance.

Bangladesh's banking system has historically depended on politically-driven credit distribution and branch-based business lending. This model has now reached its limits. Less than 25% of Bangladeshi adults now have official credit access (World Bank Findex, 2021). Over 100 million mobile financial service (MFS) accounts run outside the official banking network (BTRC, 2023).

The private sector, particularly SMEs, is hungry for reasonably priced capital. Stunting business and job growth, the World Bank projects a $2.8 billion SME finance shortfall in Bangladesh (2023). Simultaneously, poor loan allocation to large but high-risk borrowers is ballooning NPLs and severely damaging banks' balance sheets. Following business as usual in this environment is harmful and useless.

While Bangladesh's financial administration deteriorated, a worldwide technology revolution was underway. At an unprecedented pace, mobile banking, AI-driven lending, blockchain trade finance, and open banking ecosystems are transforming financial institutions.

Between 2018 and 2022, branchless banking projects provided financial access to 60 million additional clients in Indonesia (World Bank, 2023). Mobile-first microloans under M-Pesa expanded SME lending by 24% in Kenya over four years (GSMA, 2022). Bangladesh lags, even with 67% smartphone penetration (GSMA, 2023).

Compared to over 40% via MFS systems, just 12% of banking transactions are handled digitally. Should banks neglect to adapt, they risk becoming irrelevant to the next generation of companies and customers.

The danger is not theoretical; fintech sites already help millions of people who now find conventional banks sluggish, expensive, and inaccessible. Technology should help digitize current services and allow new goods to fit the changing market.

Three that are very interesting currently:

• Micro loans coupled with mobile wallets serve the informal and low-income sectors now left out of official financing.
• Supply chain financing helps SMEs, especially in the RMG and agricultural sectors, by unlocking liquidity for manufacturers and exporters.
• Green finance products encourage the acceptance of renewable energy sources, whereby worldwide investors are progressively channeling funds.

Banks that entered digital microcredit, embedded finance, and green lending enjoyed double-digit asset growth and decreased default rates globally (McKinsey Banking Review, 2023). The first banks to aggressively enter these products might restore Bangladesh's importance and profitability.

Still, without a hard reset in governance, technology and goods alone cannot save the industry.

Bangladesh's banking industry is defined by weak risk controls, politicalized board nominations, and regulatory forbearance. These elements undermine depositor trust, conceal big defaulters, and drive bad credit choices.

The reform package presented by the World Bank provides an unambiguous guide:

• Improve the frameworks of bank resolution.
• Stiffer deposit protection should be enforced.
• Specify expert, non-political board appointments.
• Start specialist asset management companies (AMCs) to clean up NPLs methodically.
• Change bankruptcy rules to hasten healing.

Vietnam provides a clear lesson: It reduced its NPL levels within five years after robust banking reforms in 2011 and revived private sector credit growth. Bangladesh has to be as politically courageous. Without governance change, no amount of digital innovation can re-establish public confidence -- the lifeblood of banking.

Policy-makers must build a regulatory climate that speeds financial innovation beyond their own reform.

Hence:

• Requiring open banking in 24 months: Letting clients safely communicate financial data encourages innovation and competitiveness.
• Starting a national fintech sandbox: Allowing deliberate exploration driven by controlled testing of new digital items.
• Investing in cybersecurity: Bangladesh's banks now spend less than 0.1% of their revenue on cybersecurity, exposing systematic vulnerabilities (Deloitte, 2023).

Early adopters of these models, like Singapore, India, and the UK, now find better, more inclusive banking environments. Bangladesh must act now or risk always falling behind.

Inaction comes at a very high cost. Every year of delay risks compounding NPLs, reducing SME access to capital, and increasing economic marginalization. The societal fallout from lost employment, failed enterprises, and dashed hopes will eventually overwhelm the obvious financial issues of today.

Still, the benefits of action are great. Modern, reliable, technologically-advanced banks might be engines for Bangladesh's next development boom, fueling investment, increasing inclusivity, and enabling entrepreneurship.

The route chart is straightforward. The technology is available here. The institutional changes have had results.

Only political will now separates Bangladesh’s banking sector from renewal or irreversible decline. The time for hesitation is over.

Mamun Rashid an economic analyst, has served for three global banks -- ANZ, Standard Chartered, Citibank, NA in senior roles at home and abroad and as financial service lead for PwC Bangladesh for more than 35 years.

Source: Dhaka Tribune.